Cashing In on Pensions
The corporate vultures circling USX Corp. are eyeing not that company’s dying steel mills, or its other productive capacity, but its over-funded pension plans. They want to buy USX, cancel its retirement plan and take the extra cash, the pensioners be damned. Any company, in fact, can cancel its pension plan anytime to get at its extra cash without consulting the beneficiaries. It is an intolerable situation, one that Congress must resolve.
Corporations are entitled to any money in excess of what is necessary to meet obligations earned by pensioners up to a specific termination date. High real interest rates and the booming stock market of recent years have endowed many pension funds with much more money than would be needed to pay off pension obligations if they were terminated today. In the past six years, nearly a thousand companies have skimmed $12 billion off their pension funds. Surplus cash is now a major factor in corporate acquisitions and mergers. Companies with over-funded plans, like USX, have become juicy takeover targets. In fact, a company that wants to buy another may even use the other company’s pension surplus to finance the takeover. Fears of being swallowed with the aid of their own pension fund have prompted some companies to cash in their plans before others could get to them.
Pension surpluses may be a boon for management, but pension cancellations can wreak havoc on the worker planning for the future. For example, the terminated pension of a 15-year employee who intends to work 25 years will be based on that 15 years and no more. Though companies usually replace the canceled plan with a new one, it frequently is not as generous. And cashing in on pension surpluses is risky business. The funds are subject to the vagaries of the market; as such, windfalls can evaporate just as quickly as they arose. Pension surpluses are properly viewed as a hedge against bad times.
The principle at issue is who owns the pension surplus. The Employee Retirement Income Security Act of 1974 says that pension funds must be used exclusively for the benefit of workers and retirees. But a loophole in that law, unforeseen by its drafters, allows corporations to raid pension funds. Managers argue, moreover, that they are assuming a risk with the pensions--which they don’t have to provide anyway--and so are entitled to cash in on investments. That’s only half right. The federal government guarantees pensions against bankruptcy, and a company may stop contributing to its fund if it is in financial distress.
Prohibiting terminations altogether would be imprudent since doing so is often necessary to avoid bankruptcy. The new tax code imposes a 10% tax on pension reversions, but that doesn’t go far enough. Congress should clarify ERISA by prohibiting corporations from skimming pension funds. That would remove the incentive for companies to terminate plans. And if corporate raiders couldn’t cash in, fat pension plans would no longer be attractive takeover targets.
Pensions are compensation deferred, and pension raiding is piracy. Today’s worker’s have every right to expect that their pensions will be used only for them. After all, it’s their money.
